When the state pension rate is set for April 2024, the rate of increase will depend on the highest of three numbers:
- The rise in average earnings (usually the three months May-July 2023 compared with the same three months in 2022); this statistic will be published in September 2023; this morning’s figure covers the three months April-June;
- The rate of CPI inflation (usually the September 2023 rate); this will be published in October 2023;
- A floor of 2.5% - which is expected to be irrelevant this year;
The latest figures that we have are:
- Average earnings (April to June 2023, compared with a year earlier, total pay including bonuses) +8.2%;
(Source: Average weekly earnings in Great Britain - Office for National Statistics
- CPI inflation (year to June 2023) +7.9%;
(Source: Consumer price inflation, UK - Office for National Statistics)
However, whilst it is expected that CPI inflation will fall sharply by the time the September CPI is published, average earnings growth has been on an upward trend, and is being boosted as public sector pay deals (including one-off payments) are reflected in the final figures.
It is therefore highly likely that it will be the rise in average earnings which determines the ‘triple lock’ increase for April 2024.
When the OBR published its ‘Economic and Fiscal Outlook 2023’ alongside the March 2023 Budget, the triple lock assumption was 6.2% - see Table A.3 (Economic and fiscal outlook - March 2023
In terms of the state pension system, the ‘triple lock’ promise applies to the ‘new’ state pension as well as the old ‘basic’ state pension (but not to ‘additional’ state pensions).
DWP’s estimates for spending in 2023/24 on the basic state pension is £66.6 billion, and on the new state pension (excluding ‘protected payments’, which are linked to CPI) is £35.2 billion, giving a combined figure of £101.8 billion. Even allowing for the fact that some of this total will be paid outside the UK, and to recipients living in ‘frozen’ countries where there are no annual increases, it is a reasonable rule of thumb that an extra 1% on state pension uprating adds around £1 billion to DWP’s state pension bill. (This does not allow for some additional income tax revenues as pensions rise faster than expected, but on the other hand does not allow for extra spending on other benefits such as pension credit if earnings rise faster than expected).
If average earnings growth were to be around 8.2% when next month’s figures are published, this would therefore suggest an extra £2 billion or so which the Treasury would have to find compared with the assumption of a 6.2% increase.
Commenting, Steve Webb, partner at LCP said: “It seems very likely that the pension rise implied by the triple lock policy will be much higher than expected at the time of the March 2023 Budget. Although inflation is coming down, the rate of average earnings growth has been heading upwards and is likely to be the key factor in determining next year’s state pension rise. An extra £2 billion bill arising from higher than expected earnings growth seems quite plausible. But it is unlikely that this would lead the government to break the triple lock, especially in the run-up to a likely 2024 General Election”.
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